Risky business: the dark side of offshore trusts and tax havens.

• Author: Spendlove, Gretta
• Position: Focus

"Click here!" exclaims an offshore banking Website, secretoffshorebanking.com. "Instant accounts. Secure your offshore account in 8 minutes," it also displays.

Accompanying that ad is an announcement from the Internal Revenue Service (IRS) about a deadline for taxpayers to disclose foreign bank accounts and non-U.S. assets. In return for paying back taxes on foreign assets for the past six years, plus interest and a set of stiff penalties, the IRS promises not to bring criminal charges or the 75 percent fraud penalty. Sweet deal, right?

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What is the truth about the risks and benefits of offshore trusts and tax havens? Are they a dangerous rip-off or a legitimate business and estate planning tool? Even the experts disagree.

Greg Barrick, a Salt Lake City attorney specializing in business and estate planning, has handled many offshore and tax haven transactions. "They work well in certain situations, but you have to do them right," he says.

The Basics

Barrick explains that offshore trusts and tax havens serve different purposes. "If I have one client who is American and another who's British, and they'll be doing business all over the world, it may not make sense to create the business in either the U.S. or Britain. We can choose a tax haven, like the Isle of Man or British Virgin Islands. The partnership pays no income taxes until profits are 'repatriated,' or paid out to partners in their home countries." As long as Americans own 50 percent or less of foreign corporations, they are not subject to the draconian provisions of the Controlled Foreign Corporations Act.

By contrast, offshore trusts are tax-neutral, but good at keeping assets away from creditors. "In the U.S., there were traditionally no statutes of limitations on setting aside transfers into 'self-settled trusts,'" Barrick says. "Those are trusts into which an individual puts money for his own benefit. In offshore sites like the Cayman or Cook islands, the statute of limitations may be as short as a few months. That means that once someone puts money into the trust, the creditors can't get it out."

Barrick describes a debtor's dream scenario: "If the owner of an offshore trust is asked at a deposition what he owns, he can say 'Nothing.' If the creditor's attorney asks him, 'What about that trust in the Cook Islands?' he can say, 'I don't own it.' And the courts in the Cook Islands will back him up."

Changing U.S. Laws

The pendulum swings back and forth as to...